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The Wall Street Journal reports that the fed funds future contracts trading makes it a lock that the Federal Reserve will cut the bench mark lending rate from 5.25% to 5%. From the Journal (h/t: CR):
Trading in December fed funds contracts translates into the market giving 100% certainty that the Fed will cut rates to 5% by the Dec. 11 Fed meeting from the current 5.25% rate. That is up from about a 44% chance at Wednesday’s close. The market is pricing in roughly 50% odds that the FOMC could cut the rate as early as the September or October meetings.
Many people who are in financing-related industries want to see this happen. I’ve spoken with several car dealers who are praying for it. Here in Orange County the car dealers have seen their volume fall way off; apparently broke loan officers is bad for the local economy.
It’s Not Going to Matter
So What? The interest rate cuts are not going to save home owners. And home owners are at the crux of the current conundrum. Here are all the things that a 0.25% rate cut CAN’T do:
- Stop payment shock from exploding ARM loans
- Stop foreclosures
- Increase home equity
- Stabilize home prices
- Loosen underwriting guidelines
- Make investors buy more mortgage backed securities
All of these things will not be reversed by a 0.25% cut to the short term rate. Will it make credit less expensive? Yes. Will that help potential home buyers? Absolutely. Will if offset the recent (and anticipated continued) carnage that has eviscerated the mortgage market? No way.
We are still in for a long correction, short term rate cuts or not. The Fed has no control over it at this point; and their hands are tied with a host of other issues that weaken their influence on this bubble even further. So for everyone cheering a potential rate cut - sober up. It’s not a silver bullet. A 0.25% rate cut doesn’t make our lives in the mortgage industry that different from today; too much has changed; far more than a simple rate cut can undo.
